Explain the banking system in India?
A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry.
A banking system also referred as a system provided by the bank which offers cash management services for customers, reporting the transactions of their accounts and portfolios, through out the day. The banking system in India, should not only be hassle free but it should be able to meet the new challenges posed by the technology and any other external and internal factors. For the past three decades, India’s banking system has several outstanding achievements to its credit. The Banks are the main participants of the financial system in India. The Banking sector offers several facilities and opportunities to their customers.
Before the establishment of banks, the financial activities were handled by money lenders and individuals. At that time the interest rates were very high. Again there were no security of public savings and no uniformity regarding loans. So as to overcome such problems the organized banking sector was established, which was fully regulated by the government. The organized banking sector works within the financial system to provide loans, accept deposits and provide other services to their customers.
The following functions of the bank explain the need of the bank and its importance:
• To provide the security to the savings of customers.
• To control the supply of money and credit
• To encourage public confidence in the working of the financial system, increase savings speedily and efficiently.
• To avoid focus of financial powers in the hands of a few individuals and institutions.
• To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of customers
The main reasons why the banks are heavily regulated are as follows:
• To protect the safety of the public’s savings.
• To control the supply of money and credit in order to achieve a nation’s broad economic goal.
• To ensure equal opportunity and fairness in the public’s access to credit and other vital financial services.
• To promote public confidence in the financial system, so that savings are made speedily and efficiently.
• To avoid concentrations of financial power in the hands of a few individuals and institutions.
• Provide the Government with credit, tax revenues and other services.
• To help sectors of the economy that they have special credit needs for eg. Housing, small business and agricultural loans etc.